The Centre will front-load its ₹70,000-crore capital infusion into public sector banks to nudge additional lending of ₹5 trillion, said finance minister Nirmala Sitharaman. Typically, capital infusions are staggered over a period of time.
In FY19, the government had infused more than ₹1 trillion in public sector banks. The last tranche of ₹48,239 crore in February had allowed six lenders to exit the Reserve Bank of India’s (RBI’s) prompt corrective action (PCA) scheme. The central bank uses the PCA framework to ring-fence lenders breaching regulatory thresholds in bad loans and capital adequacy.
The government also announced measures to support non-banking financial companies (NBFCs) and housing finance companies (HFCs). To support HFCs, the government has assured additional liquidity support of ₹20,000 crore by the National Housing Bank, taking the total to ₹30,000 crore, said Sitharaman.
The finance minister also said that banks will pass on RBI’s repo rate cuts to customers. “Banks have decided to pass on rate cuts through marginal cost of funds based lending rate reduction to benefit all borrowers," she said.
Banks, said Sitharaman, have also decided to link their lending rates with the Reserve Bank of India’s repo rate, leading to lower EMIs (equated monthly instalments) for housing, auto and other retail loans. “Working capital loans for industry will also become cheaper," she added.
To be sure, banks have already started linking their lending rates to an external benchmark.
The country’s largest lender State Bank of India (SBI) was the first major bank to link a section of its lending rates to RBI’s repo rate in March. Union Bank of India and Bank of Baroda have followed suit.
To stop harassment of borrowers and to bring in greater efficiency, public sector banks have been mandated to return loan documents within 15 days of closure. This is expected to help borrowers who mortgaged assets.
Sitharaman said customers will soon be able to track the status of their loan applications across all products including retail, micro small and medium enterprises (MSMEs), housing, automobiles, working capital, limit enhancements and renewals.
That apart, banks will soon issue an improved and transparent policy for one-time settlements (OTS) to benefit MSMEs and retail borrowers in settling their dues. This policy, she said, will follow a check-box approach through which settlements will depend on meeting certain criteria.
To support decision-making of bankers and to prevent harassment for genuine commercial decisions, the Central Vigilance Commission has issued directions that the internal advisory committees of banks can now classify cases as vigilance and non-vigilance.
Arijit Basu, managing director of SBI, said upfronting of the capital infusion will help repair the balance sheet of public sector banks. “Moreover, the decision to seek a more transparent and quick process for OTS of small loans will lead to quicker recovery from old stressed accounts and allow fresh lending," he added.
Sitharaman said the partial credit guarantee scheme announced in the budget for the purchase of pooled assets of NBFCs and HFCs will be monitored at the highest level. As part of the ₹1 trillion scheme, which was announced for restoring liquidity in NBFCs, the government will provide one-time six-month partial credit guarantee to public sector banks for the first loss of up to 10% for the purchase of high-rated assets.
For easier on-boarding of customers, the finance minister also allowed NBFCs to use the banking system’s Aadhaar-authenticated KYC (know your customer) norms to avoid duplication and repetition. Moreover, Sitharaman stressed the need for co-origination of loans by public sector banks and NBFCs to take advantage of the liquidity available with banks and the reach of non-banks.
The central bank had released guidelines on co-origination by banks and NBFCs last September.